Research Paper On FII

Vol. 1, No.
3 July - September, 2012
Impact of Foreign Institutional Investments on Equity Stock

Market of India
- Varsha Virani *
Abstract
Capital inflows play a substantial role in developing countries. It used to increase
accumulation and rate of investments to create conditions for more intensive economic
growth. Institutional Investor is any investor or investment fund that is from or registered
in a country outside of the one in which it is currently investing. Institutional investors
include hedge funds, insurance companies, pension funds and mutual funds. The growing
Indian market had attracted the foreign investors, which are called Foreign Institutional
Investors (FII) to Indian market, and in this paper, we are trying a simple attempt to explain
the impact and extent of foreign institutional investors in Indian stock market. International
institutional investors must register with the Securities & Exchange Board of India (SEBI)
to participate in the market.
Keywords: FIIs, Portfolio, Stock Market, SEBI, Economic Growth.
1. Introduction
Foreign capital has significant role for every national economy, regardless of its level of
development. For the developed countries it is necessary to support sustainable development. For
the developing countries, it is used to increase accumulation and rate of investments to create
conditions for more intensive economic growth. For the transition countries, it is useful to carry out
the reforms and cross to open economy, to cross the past long term problems and to create conditions
for stable and continuous growth of GDP, as well as integration in world economy. But, to realize
the potential exist in the developing countries, foreign capital plays a very crucial role. FII is defined
as an institution organized outside of India for the purpose of making investments into the Indian
securities market under the regulations prescribed by SEBI. ‘FII’ include “Overseas pension funds,
mutual funds, investment trust, asset management company, nominee company, bank, institutional
portfolio manager, university funds, endowments, foundations, charitable trusts, charitable societies,
a trustee or power of attorney holder incorporated or established outside India proposing to make
proprietary investments or investments on behalf of a broad-based fund. FIIs can invest their own
funds as well as invest on behalf of their overseas clients registered as such with SEBI.
These client accounts that the FII manages are known as ‘sub-accounts’. One of the major
market regulations pertaining to FIIs involves placing limits on FII ownership in Indian companies.
* Asst. Professor, R. K. College of Business Management, Kasturbadham, Bhavnagar Highway, Rajkot – 360020.
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SUMEDHA Journal of Management
They actually evaluate the shares and deposits in a portfolio. The major source (almost 50%) of
money the FIIs invest is from the issue of Participatory Notes (P-Notes) or what are sometimes
called Offshore Derivatives. There are over 1484 FIIs and 38 foreign brokers registered to Securities
& Exchange Board of India (SEBI). We are also examining whether market movement can be
explained by these investors. We often hear that whenever there is a rise in market, it is explained
that it is due to foreign investors’ money and a decline in market is termed as withdrawal of money
from FIIs. But the sub-prime crisis and other economic conditions had caused a liquidity crunch for
these institutions. So they are forced to withdraw money from Indian market so as to repay loans
they had taken. These withdrawals had caused panic in market, and even domestic investors are
making them sell their shares. But one aspect we should agree on is that the FII’s increased role
had changed the face of Indian Stock Market. It has brought both qualitative and quantitative
change. It had also increased the breadth and depth of market.
Institutional investors will have a lot of influence in the management of corporations because
they will be entitled to exercise the voting rights in a company. They can actively engage in corporate
governance. Furthermore, because institutional investors have the freedom to buy and sell shares,
they can play a large part in which companies stay solvent, and which go under. Influencing the
conduct of listed companies, and providing them with capital are all part of the job of management.
One of the most important features of the development of stock market in India in the last 20 years
has been the growing participation of FIIs.
Overview of Indian Stock Market

The working of stock exchanges in India started in 1875. BSE is the oldest stock market in
India. The history of Indian stock trading starts with 318 persons taking membership in Native
Share and Stock Brokers Association, which we now know by the name Bombay Stock Exchange
or BSE in short. In 1965, BSE got permanent recognition from the Government of India. National
Stock Exchange comes second to BSE in terms of popularity. BSE and NSE represent themselves
as synonyms of Indian stock market. The history of Indian stock market is almost the same as the
history of BSE. The 30 stock sensitive index or Sensex was first compiled in 1986. The Sensex is
compiled based on the performance of the stocks of 30 financially sound benchmark companies. In
1990 the BSE crossed the 1000 mark for the first time. It crossed 2000, 3000 and 4000 figures in
1992. The reason for such huge surge in the stock market was the liberal financial policies announced
by the then financial minister Dr. Man Mohan Singh.
The up-beat mood of the market was suddenly lost with Harshad Mehta scam. It came to
public knowledge that Mr. Mehta, also known as the big-bull of Indian stock market diverted huge
funds from banks through fraudulent means. He played with 270 million shares of about 90 companies.
Millions of small-scale investors became victims to the fraud as the Sensex fell flat shedding 570
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Vol. 1, No.3 July - September, 2012
points. To prevent such frauds, the Government formed The Securities and Exchange Board of
India, through an Act in 1992. SEBI is the statutory body that controls and regulates the functioning
of stock exchanges, brokers, sub-brokers, portfolio manager’s investment advisors etc. SEBI oblige
several rigid measures to protect the interest of investors. Now with the inception of online trading
and daily settlements the chances for afraud is nil, says top officials of SEBI. Sensex crossed the
5000 mark in 1999 and the 6000 mark in 2000. The 7000 mark was crossed in June and the 8000
mark on September 8 in 2005. Many foreign institutional investors (FII) are investing in Indian
stock markets on a very large scale. The liberal economic policies pursued by successive Governments
attracted foreign institutional investors to a large scale. Experts now believe the sensex can soar
past 14000 marks before 2010. The unpredictable behavior of the market gave it a tag – ‘a volatile
market.’ The factors that affected the market in the past were good monsoon, Bharatiya Janatha
Party’s rise to power etc. The result of a cricket match between India and Pakistan also affected
the movements in Indian stock market. The National Democratic Alliance led by BJP, during 2004
public elections unsuccessfully tried to ride on the market sentiments to power. NDA was voted out
of power and the sensex recorded the biggest fall in a day amidst fears that the Congress-Communist
coalition would stall economic reforms. Later prime minister Man Mohan Singh’s assurance of
‘reforms with a human face’ cast off the fears and market reacted sharply to touch the highest
ever mark of 8500. India, after United States hosts the largest number of listed companies. Global
investors now ardently seek India as their preferred location for investment. Once viewed with
skepticism, stock market now appeals to middle class Indians also. Many Indians working in foreign
countries now divert their savings to stocks. This recent phenomenon is the result of opening up of
online trading and diminished interest rates from banks. The stockbrokers based in India are opening
offices in different countries mainly to cater the needs of Non Resident Indians. The time factor
also works for the NRIs. They can buy or sell stock online after returning from their work places.
The recent incidents that led to growing interest among Indian middle class are the initial public
offers announced by Tata Consultancy Services, Maruti Udyog Limited, ONGC and big names like
that. Good monsoons always raise the market sentiments. A good monsoon means improved
agricultural produce and more spending capacity among rural folk. The bullish run of the stock
market can be associated with a steady growth of around 6% in GDP, the growth of Indian companies
to MNCs, large potential of growth in the fields of telecommunication, mass media, education,
tourism and IT sectors backed by economic reforms ensure that Indian stock market continues its
bull run.
2. Review of Literature
Ravi Akula, (2011): “An Overview of Foreign Institutional Investment in India” Most of the
under developed countries suffer from low level of income and capital accumulation. Though,
despite this shortage of investment, these countries have developed a strong urge for industrialization
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and economic development. As we know the need for Foreign capital arises due to shortage from
domestic side and other reasons. It is observed that the FIIs investment has shown significant
improvement in the liquidity of stock prices of both BSE and NSE. However, there is a high degree
of positive co-efficient of correlation between FIIs investment and market capitalization, FIIs
investment and BSE & NSE indices, revealing that the liquidity and volatility was highly influenced
by FIIs flows. Further, it is also proved that FIIs investment was a significant factor for high
liquidity and volatility in the capital market prices.
Anand Bansal, (2009): “Foreign Institutional Investor’s Impact on Stock Price in India” The
impact of market opening to FIIs, on Indian stock market behavior. India announced its policy
regarding the opening of stock market to FIIs for investment in equity and related instruments on
14th September 1992. Using stock market data related to Bombay Stock Exchange, for both before
and after the FIIs policy announcement day. An empirical examination has been conducted to
assess the impact of the market opening on the returns and volatility of stock return. We found that
while there is no significant changes in the Indian stock market average returns, volatility is
significantly reduced after India unlocked its stock market to foreign investors.
S. V. Aditya Vidyasagar (2007): “Role of FIIs in Indian Capital Market” The second fastest
growing economy after China has lately been a major recipient of foreign institutional investor (FII)
funds driven by the strong fundamentals and growth opportunities. Both consumption and investment-
led industries linked to domestic demand, such as auto, banking, capital goods, infrastructure and
retail, are likely to continue attracting FII funds. India on the other hand despite recession’s dark
clouds lingering around it, has been able to manage a decent growth rate and the best part is that
inspite of some early sell outs, FIIs have reposed their faith in the fundamentals of Indian economy
by reinvesting in India. Thus India even though has certain issues which are to be sorted out but still
remains a potent FII attractor and retainer which is generating wealth for everyone concerned.
Kulwant Rai & N R Bhanumurthy (2007):”Determinants of Foreign Institutional Investment
in India” The role of Return, Risk and Inflation his study tries to examine the determinants of
Foreign Institutional Investments in India, which have crossed almost US$ 12 billion by the end of
2002. Given the huge volume of these flows and its impact on the other domestic financial markets
understanding the behavior of these flows becomes very important at the time of liberalizing capital
account. In this study, by using monthly data, we found that FII inflow depends on stock market
returns, inflation rate (both domestic and foreign) and ex-ante risk. In terms of magnitude, the
impact of stock market returns and the ex-ante risk turned out to be major determinants of FII
inflow. This study did not find any causation running from FII inflow to stock returns as it was found
by some studies. Stabilizing the stock market volatility and minimizing the ex-ante risk would help in
attracting more FII inflow that has positive impact on the real economy. Kumar (2005): “An important
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feature of the development of stock market in India” In the last 15 years has been the growing
participation of Institutional Investors, foreign institutional investors and the Indian mutual funds
combined together, the total assets under their management amounts to almost 18% of the entire
market capitalization. This paper examines the role of these investors in Indian stock markets and
finds that the market movement can be explained using the direction of the funds flow from these
investors.
Rajesh Chakrabarti (2001): “FII Flows to India: Nature and Causes” Since the beginning of
liberalization FII flows to India have steadily grown in importance. In this paper we analyze these
flows and their relationship with other economic variables and arrive at the following major
conclusions: (a) While the flows are highly correlated with equity returns in India, they are more
likely to be the effect than the cause of these returns; (b) The FIIs do not seem to be at an
informational disadvantage in India compared to the local investors; (c) The Asian Crisis marked a
regime shift in the determinants Of FII flows to India with the domestic equity returns becoming the
sole driver of these flows since the crisis. Given the thinness of the Indian market and its susceptibility
to manipulations, FII flows can aggravate the equity market bubbles, though they do not actually
start them.
P. K. Mishra (1980):FII Inflow and The Indian Equity Market There was a general
disinclination towards foreign investment or private commercial flows as India’s development strategy
was focused on self-reliance and import substitution and current account deficits were financed
largely through debt flows and official development assistance. After the launch of the reforms,
Foreign Institutional Investors (FIIs) have been allowed to invest in all securities traded on the
primary and secondary markets, including shares, debentures and warrants issued by companies
which were listed or were to be listed on the Stock Exchanges in India and in schemes floated by
domestic mutual funds. From September 14, 1992, with suitable restrictions, FIIs were permitted to
invest in financial instruments. Since then foreign portfolio inflows through FIIs, in India, have been
important from the policy perspective, especially when the country has emerged as one of the most
attractive investment destinations in Asia. As on June 4, 2009, the net equity investment by FIIs in
India is `. 2, 52,233.10 crore.
3. Objectives of the Study

1. To examine whether FIIs have any influence on Equity Stock Market.
2. To know the volatility of stocks due to FIIs.
3. To analyze the trends of Foreign Institutional Inflows.
4. To study the activities such as investments and sales by the FIIs in the recent past
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4. Hypothesis
Null Hypothesis (Ho): There is no influence of FIIs on the equity stock market
Alternative Hypothesis (Ha): There is an influence of FIIs on equity Stock market.
5. Research Methodology
There are two types of data i.e. primary and secondary. The present study is mainly based
on secondary data. The researcher has used various websites relating to stock market and FII for
the study. The surveys and articles publish in newspaper, journals, various books, periodicals, relating
to the subject has provided useful data. The collected data will be classified, analyzed and tabulated
as per the requirement.
6. Data Analysis
Impact of FII on Indian Stock Market
The Indian government has established a regulatory framework for three separate investment
avenues: foreign direct investment; investment by foreign institutional investors; and investment by
foreign venture capital investors. While these investment alternatives have created clear avenues
for foreign investment in India, they remain subject to many conditions and restrictions which
continue to hamper foreign investment in India. Foreign direct investment is proven to have well-
known positive effect through technology spillovers and stable investments tied to plant and equipment,
but portfolio capital is associated more closely with volatility and its capacity to be triggered by both
domestic as well as exogenous factors, making it extremely difficult to manage and control. Chakrabarti
(2001) has examined in his research that following the Asian crisis and the bust of info-tech bubble
internationally in 1998-99 the net FII has declined by US$ 61 million. But there was not much effect
on the equity returns. This negative investment would possibly disturb the long-term relationship
between FII and the other variables like equity returns, inflation, etc. has marked a regime shift in
the determinants of FII after Asian crisis. The study found that in the pre-Asian crisis period any
change in FII found to have a positive impact on the equity returns. But in the post-Asian crisis
period it was found the reverse relation that change in FII is mainly due to change in equity returns.
FIIs have played a very important role in building up India’s forex reserves, which have
enabled a host of economic reforms. FIIs are now important investors in the country’s economic
growth despite sluggish domestic sentiment. The Morgan Stanley report notes that FII strongly
influence short-term market movements during bear markets. However, the correlation between
returns and flows reduces during bull markets as other market participants raise their involvement
reducing the influence of FIIs. The correlation between foreign inflows and market returns is high
during bear and weakens with strengthening equity prices due to increased participation by other
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players. The equity return has a significant and positive impact on the FII. But given the huge
volume of investments, foreign investors could play a role of market makers and book their profits,
i.e., they can buy financial assets when the prices are declining thereby jacking-up the asset prices
and sell when the asset prices are increasing. Hence, there is a possibility of bi-directional relationship
between FII and the equity returns. India opened its doors to foreign institutional investors in
September, 1992. This event represents a landmark event since it resulted in effectively globalizing
its financial services industry. The decision to open up the Indian financial market to FII portfolio
flows was influenced by several factors such as the disarray in India’s external finances in 1991
and a disorder in the country’s capital market. Aimed primarily at ensuring non-debt creating capital
inflows at a time of an extreme balance of payment crisis and at developing and disciplining the
nascent capital market, foreign investment funds were welcomed to the country.
Trends in FII Investment in India
The term “trend analysis” refers to the concept of collecting information and attempting to
spot a pattern, or trend, in the information. Although trend analysis is often used to predict future
events, it could be used to estimate uncertain events in the past. In statistics, trend analysis often
refers to techniques for extracting an underlying pattern of behavior in a time series which would
otherwise be partly or nearly completely hidden by noise.
Table1 : Trend in FII Investment (Year: 2006)
Equity ( ` crores)
Month Gross Gross Net
purchases sales Investment
Apr-06 40,415.60 39,826.40 589.2
May-06 49,338.20 57,585.50 -8,247.20
Jun-06 39,845.60 38,427.40 1,418.20
Jul-06 24,983.10 23,535.20 1,447.90
Aug-06 28,104.60 23,330.60 4,774.00
Sep-06 33,014.20 26,782.50 6,231.70
Oct-06 27,591.94 23,013.30 4,578.54
Nov-06 31,146.96 24,572.22 6,574.74
Dec-06 37,419.50 40,830.40 -3,410.90
Source: compiled data
On observation of the above table of trends in monthly Gross Purchases, the Gross Purchases
of FIIs in India registered a record of ` 37420 crores in the month December 2006, a growth rate
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of 83% compared to the previous month November 2006. However it is less than to month May but
it shows increase trend which shows the positive impact. During the month December 2006 FIIs
Gross Sales amounted an increase ` 40830 crores when compared to ` 24572 crores. The FIIs
Gross Sales shows an upward trend with reference to the base month of April 2006 when the Gross
Sales where only ` 39826 crores. From the above given table, we can see that the net inflow of FII
shown huge decline in MAY-06. The decline is because of the lower portfolio inflows, as a result of
which the net investment has dropped in this month. However, after that there was gradually
increase in trend. But again there was sharp reversal in the month DEC-06. The country has to
work on specific measures to encourage more FII investments.
Table 2 : Trends In FII Investment (Year: 2007)
Equity ( ` crores)
Month
Gross purchases Gross sales Net Investment
Jan-07 47,506.77 47,412.32 94.45
Feb-07 51,568.90 45,503.90 6,065.00
Mar-07 50,552.60 49,149.30 1,403.30
Apr-07 44,701.50 39,269.70 5,431.80
May-07 51,574.90 47,000.40 4,574.50
Jun-07 54,748.50 46,808.90 7,939.60
Jul-07 80,216.20 62,083.40 18,132.80
Aug-07 58,223.20 65,750.00 -7,526.80
Sep-07 70,694.60 51,746.10 18,948.50
Oct-07 124,882.30 109,304.70 15,577.60
Nov-07 89,510.00 94,107.40 -4,597.40
Dec-07 80,988.10 76,091.40 4,896.70
of FIIs in India registered a record of ` 80988 crores in the month December 2007, a decline rate
of 90% compared to the previous month November 2007. However it is more than the month
January but it shows decrease trend compare to the month October. During the month December
2007 FIIs Gross Sales amounted a decrease ` 76091 crores when compared to ` 94107 crores.
The FIIs Gross Sales shows a downward trend. However it is comparatively more than the month
January 2007. Above table concludes that, there were fewer declines in net inflow of FII during
YEAR-07 compared to YEAR-06 but there were more fluctuations in 2007 compared to 2006
which shows instability of FII in our country due to various reasons.
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Table 3 : Trends in FII Investment (Year: 2008)

Equity ( ` crores)
Month
Gross purchases Gross sales Net Investment
Jan-08 103,129.00 120,455.30 -17,326.30
Feb-08 76,437.10 71,017.20 5,419.90
Mar-08 70,322.70 70,198.30 124.04
Apr-08 62,969.60 61,990.60 979.00
May-08 60,640.30 65,557.60 -4,917.30
Jun-08 61,490.60 72,068.30 -10,577.70
Jul-08 64,526.30 65,539.20 -1,012.90
Aug-08 46,401.90 48,467.70 -2,065.80
Sep-08 68,029.60 75,966.60 -7,937.00
Oct-08 49,339.30 63,587.90 -14,248.60
Nov-08 28,273.80 31,094.10 -2,820.30
Dec-08 29,197.60 27,866.70 1,330.90
of FIIs in India registered of ` 29198 crores in the month December 2008, it is comparatively high
from the month November but actually it shows a downward trend while compare it with the base
month January 2008. During the month December 2008 FIIs Gross Sales amounted a decrease
` 27867 crores when compared to ` 31094 crores. The FIIs Gross Sales shows a downward trend
with reference to the base month of January 2006 when the Gross Sales were ` 120455 crores.
Above given table shows huge decline in many months during year-08.This shows critical
position of FII inflows in our country. Market analysts attribute this largely to redemption pressures,
triggered in part by uncertainty in the global markets coupled with the expected slowdown in
economy. As per data furnished by companies, of the 50 Nifty companies that have disclosed their
shareholding details as on 2008, there has been a decline in the FII holding in 18 companies.
Table – 4 Trends in FII Investment (Year: 2009)
Equity ( ` crores)
Month Gross Net
Gross sales
purchases Investment
Jan-09 30,764.70 33,774.20 -3,009.50
Feb-09 21,863.20 24,553.70 -2,690.50
Mar-09 32,177.40 31,908.40 269.00
Apr-09 40,881.70 33,497.50 7,384.20
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May-09 77,886.40 57,279.50 20,606.90

Jun-09 64,250.00 61,025.10 3,224.90
Jul-09 70,256.40 58,631.10 11,625.30
Aug-09 51,979.90 47,951.20 4,028.70
Sep-09 69,884.90 49,945.40 19,939.50
Oct-09 69,514.80 61,210.70 8,304.10
Nov-09 47,457.10 42,139.30 5,317.80
Dec-09 49,088.00 38,720.80 10,367.20
of FIIs in India registered of `49088 crores in the month December 2009; a growth rate of 97%
compared to the previous month November 2006.However it is less than to month May 2009 but it
shows increase trend which shows the positive impact. During the month December 2009 FIIs
Gross Sales amounted a decrease trend ` 38721 crores when compared to it with previous month
i.e., ` 42139 crores. In the year 2009 he FIIs Gross Sales shows a fluctuation in the gross sales
amount sometimes it peak the height and sometime it fall apart. From the above given data, we can
see that after the major decline in the last year, in 2009 FII flocked back to bet on the India. This is
the highest ever inflow in the country. However, this was the sign of revival of economies, the trend
turned positive during this year and overseas investors started betting big on the domestic bourses.
Table - 5 Trends in FII Investment (Year: 2010)
Equity ( ` crores)
Month Gross Gross sales Net
purchases Investment
Jan-10 62,070.30 62,373.20 5,902.40
Feb-10 40,795.70 38,682.20 2,113.50
Mar-10 60,009.60 41,176.00 18,833.60
Apr-10 61,602.90 51,838.40 9,764.50
May-10 50,614.80 59,244.70 -8,629.90
Jun-10 54,930.60 44,686.00 10,244.60
Jul-10 59,332.40 42,211.80 17,120.60
Aug-10 61,973.40 50,788.10 11,185.30
Sep-10 81,024.80 51,829.00 29,195.80
Oct-10 85,490.20 60,719.40 24,770.80
Nov-10 89,082.60 70,562.70 18,519.90
Dec-10 61,475.30 59,999.20 1,476.10
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of FIIs in India registered a record of ` 61475 crores in the month December 2010, a decline rate
of 70% compared to the previous month November 2010. We can see that it fall in the month
February but after that it continuously increasing but it again fall in the month December 2010.
During the month December 2010 FIIs Gross Sales shows a decrease trend ` 59999 crores when
compared to it with previous month i.e., ` 70563 crores. In the year 2010 the FIIs Gross Sales
shows a fluctuation in the gross sales amount sometimes it peak the height and sometime it fall
apart. From the above data we can see that an increase trend of FIIs in the stock market continues
in the YEAR 2010 also. However there is a decline in the month May 2010 but after that it
continues to rise. At the last quarter of the year it shows the downward trend but not shows the
negative impact.
F-Statistic:
explained variance
F = ––––––––––––––––––
unexplained variance
Testing the Hypothesis
Null Hypothesis (H0): There is no influence of FIIs on the Stock market
Alternative Hypothesis (Ha): There is an influence of FIIs on Stock market.
Table- 6 F-statistics FII and S&P CNX Nifty (Year: 2006)
Mean Variance
NET
Month Buy Sell Buy Sell Indices
Investment
Value Value Value Value
Apr 2194.29 2332.11 1144062.94 653198.32 589.02 3495.28
May 1991.71 2517.10 278533.17 561361.14 -8,247.20 3437.41
Jun 1646.30 1611.88 339868.17 276253.11 1,418.20 2914.91
July 1151.83 1181.08 125869.97 45909.05 1,447.90 3092.11
Aug 1155.17 1062.48 104544.30 49068.33 4,774.00 3305.58
Sep 1421.73 1272.56 131607.38 66975.26 6,231.70 3492.13
Oct 1752.05 1595.70 411820.97 272630.19 4,578.54 3649.43
Nov 2307.74 2161.80 384830.91 359021.11 6,574.74 3868.61
Dec 1702.88 1748.44 449668.16 425554.16 -3,410.90 3910.18
From the above table of f-test analysis we can see that the net investment of FIIs becomes
negative in the month May 2006 and December 2006. However, the all over result shows the rosy
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picture of the inflow of the foreign investment. Because of negative amount of FIIs net investment,
its impact can be seen on the Indian equity stock market. In the month of May 2006, the indices
amount falls from 3495.28 to 3437.41. Therefore we can say that FIIs have significant influence on
Equity Indexes Nifty.
Tabale 7 : F-statistics FII and S&P CNX Nifty (Year: 2006)
Observations Degree of freedom
critical Description-
Month Buy Sell Buy Sell F test
value on
Apr 17 17 16 16 1.75 2.33 Accepted
May 22 22 21 21 0.50 0.48 Rejected
Jun 23 23 22 22 1.23 2.05 Accepted
July 21 21 20 20 2.74 2.12 Rejected
Aug 22 22 21 21 2.13 2.08 Rejected
Sep 21 21 20 20 1.97 2.12 Accepted
Oct 20 20 19 19 1.51 2.17 Accepted
Nov 20 20 19 19 1.07 2.17 Accepted
Dec 20 20 19 19 1.06 2.17 Accepted
Above table shows the calculation table of F-test for the year 2006. Hypothesis: Null
Hypothesis (H0): There is no influence of FIIs on the equity stock market Alternative Hypothesis
(Ha): There is an influence of FIIs on Stock market. Comparing the F-test to the critical value at
the 5% level the last column shows the result of analysis. From that result we can exhibit that the
in the year 2006 the null hypothesis are mostly accepted which shows that there is no influence of
FIIs in the Indian equity stock market.
Table 8 F-statistics FII and S&P CNX Nifty (Year: 2007)
Mean Variance
NET
Investment
Jan 2283.80 2305.46 429790.32 370295.9464 94.45 4037.07
Feb 2423.62 2437.44 351314.81 634584.9037 6,065.00 4083.74
March 2227.03 2252.49 512241.54 622423.675 1,403.30 3731.13
Apr 2182.38 2095.65 329078.78 213304.4899 5,431.80 3947.28
May 2205.54 2211.25 379124.56 328052.7875 4,574.50 4178.82
Jun 2174.95 2239.77 149356.27 229373.5808 7,939.60 4222.17
July 3170.79 2813.12 547414.38 595357.8791 18,132.80 4474.18
Aug 2385.43 2946.27 456857.18 1531275.874 -7,526.80 4301.36
Sep 3383.23 2565.33 2355414.39 691572.4002 18,948.50 4659.92
Oct 5562.94 5198.56 1636022.69 3525772.627 15,577.60 5341.95
Nov 3784.93 4407.17 1948699.29 1820611.156 -4,597.40 5748.58
Dec 3760.72 4119.66 1062295.04 1575241.098 4,896.70 5963.57
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Above table exhibit that in the month of August 2007 and November 2007, there is negative
amount of net investment which means in that month the sell value is higher than the buy value
which adversely affects our stock market. However, in this year mostly the amounts of net investments
are positive, which indicates that there was much foreign investments in our market. This is very
beneficial for our country.
Table 9 : F-statistics FII and S&P CNX Nifty (Year: 2007)
critical Description-
Month Buy Sell Buy Sell F test
value on
Jan 20 20 19 19 1.16 2.17 Accepted
Feb 19 19 18 18 0.55 0.45 Rejected
March 21 21 20 20 0.82 0.47 Rejected
Apr 20 20 19 19 1.54 2.17 Accepted
May 21 21 20 20 1.16 2.12 Accepted
Jun 21 21 20 20 0.65 0.47 Rejected
July 22 22 21 21 0.92 0.48 Rejected
Aug 22 22 21 21 0.30 0.48 Accepted
Sep 20 20 19 19 3.41 2.17 Rejected
Oct 22 22 21 21 0.46 0.48 Accepted
Nov 22 22 21 21 1.07 2.08 Accepted
Dec 19 19 18 18 0.67 0.45 Rejected
Above table shows the calculation table of F-test for the year 2007. Comparing the F-test to
the critical value at the 5% level the last column shows the result of analysis. From that result we
can exhibit that the in the year 2007 the null hypothesis are neither mostly rejected nor mostly
accepted, which shows that we cannot predict the impact of FIIs in the Indian equity stock market.
Mean Variance
NET
Investment
Jan 4242.59 5522.91 1361640.83 4403394.0567 -17,326.30 5756.35
Feb 3060.36 3253.27 639296.53 977469.4201 5,419.90 5201.56
March 3804.03 4013.13 526322.95 691369.3475 124.04 4769.50
Apr 2977.35 3104.19 270143.72 260958.5189 979 .00 4901.91
May 2949.15 3283.93 377483.64 558153.3615 -4,917.30 5028.66
113
July 2697.86 2898.03 849767.31 406711.5317 -1,012.90 4124.60

Aug 2223.03 2495.83 998016.64 595283.5792 -2,065.80 4417.12
Sep 3139.63 3735.00 2013768.79 2018369.683 -7,937.00 4206.69
Oct 2420.68 3203.36 816649.19 1388087.068 -14,248.60 3210.22
Nov 1560.77 1864.05 221270.56 127758.8965 -2,820.30 2834.79
Dec 1398.22 1348.95 419214.51 248106.8937 1,330.90 2895.80
The above table shows more negative amount of net investments of FIIs which shows that
there is negative impact of FIIs on our stock market. This indicates that foreign investors made
more selling Indian equity stock due to adverse economic situations. This in turn negatively affected
our stock market.
Critical
Month Buy Sell Buy Sell F test Description-on
value
Jan 23 23 22 22 0.31 0.49 Accepted
Feb 21 21 20 20 0.65 0.47 Rejected
March 18 18 17 17 0.76 0.44 Rejected
Apr 20 20 19 19 1.04 2.17 Accepted
May 20 20 19 19 0.68 0.46 Rejected
Jun 21 21 20 20 0.54 0.47 Rejected
July 23 23 22 22 2.09 2.05 Rejected
Aug 20 20 19 19 1.68 2.17 Accepted
Sep 21 21 20 20 1.00 0.47 Rejected
Oct 20 20 19 19 0.59 0.46 Rejected
Nov 18 18 17 17 1.73 2.27 Accepted
Dec 21 21 20 20 1.69 2.12 Accepted
can exhibit that the in the year 2008 the null hypothesis are rejected which shows that there is an
impact of FIIs in the Indian equity stock market. Though the rejected values are more than the
accepted value but we can t ignore the accepted values because there is a minor difference between
them.
114

Mean Variance
NET
Investment
Jan 1422.39 1681.03 426142.74 583350.3949 -3,009.50 2854.36
Feb 1161.38 1310.51 91123.20 100296.5909 -2,690.50 2819.21
March 1582.35 1616.52 389341.04 150271.1724 269.00 2802.27
Apr 2286.56 1959.50 608892.83 382724.1844 7,384.20 3359.83
May 3650.85 2956.54 6789271.01 3302690.611 20,606.90 3957.96
Jun 2807.61 2811.48 720172.74 634878.3333 3,224.90 4436.37
July 2564.80 2624.13 826936.51 672191.3774 11,625.30 4343.10
Aug 2177.26 2356.65 166398.41 266679.7846 4,028.70 4571.11
Sep 3219.89 2587.73 1596087.87 460632.2502 19,939.50 4859.31
Oct 3200.33 3200.31 976410.50 1177624.735 8,304.10 4994.11
Nov 2438.10 2352.69 219642.36 223391.7663 5,317.80 4953.54
Dec 2144.29 1942.34 315124.09 244787.6491 10,367.20 5099.74
The above table shows the positive amount of net investments which indicates that FIIs had
positively influence on our stock market. Because there is more buying of our stock than selling due
to good economic situations of our country. Foreign investors are been attracted to our stock
market during this year.
Critical
Month Buy Sell Buy Sell F test Description-on
value
Jan 20 20 19 19 0.73 0.46 Rejected
Feb 19 19 18 18 0.91 0.45 Rejected
March 20 20 19 19 2.59 2.17 Rejected
Apr 17 17 16 16 1.59 2.33 Accepted
May 20 20 19 19 2.06 2.17 Accepted
Jun 22 22 21 21 1.13 2.08 Accepted
July 23 23 22 22 1.23 2.05 Accepted
Aug 21 21 20 20 0.62 0.47 Rejected
Sep 20 20 19 19 3.46 2.17 Rejected
Oct 20 20 19 19 0.83 0.46 Rejected
Nov 20 20 19 19 0.98 0.46 Rejected
Dec 21 21 20 20 1.29 2.12 Accepted
115
can exhibit that the in the year 2007 the null hypothesis are mostly rejected. Therefore we conclude
from the test analysis that there is an influence of FIIs in the Indian equity stock market.
Mean Variance
NET
Investment
Jan 2881.29 3225.07 911163.91 1290321.19 5,902.40 5156.22
Feb 1950.48 2049.08 3703429.07 2192238.99 2,113.50 4839.57
March 2842.50 2138.11 540713.80 349394.83 18,833.60 5178.15
Apr 2753.05 2619.68 372899.35 329375.82 9,764.50 5294.76
May 2394.39 2994.81 454337.46 582742.27 -8,629.90 5052.97
Jun 2358.09 2007.46 520939.14 202034.79 10,244.60 5187.78
July 2429.51 2051.30 525225.28 226760.84 17,120.60 5359.75
Aug 2716.34 2386.31 235776.36 293004.52 11,185.30 5457.24
Sep 3738.01 2613.61 1434195.32 350160.51 29,195.80 5811.48
Oct 3700.29 3015.14 931791.24 800151.80 24,770.80 6096.11
Nov 3816.27 3553.50 3703429.07 2192238.99 18,519.90 6055.33
Dec 2672.86 2702.02 911163.91 1290321.19 1,476.10 5971.32
From the above table, it is indicated that the year 2010 is most beneficial year compared to
above four years. During this year there is huge buying of our stock by the FIIs. This means that
foreign investors had made huge investments in our equity stock market due to analyst’s prediction
that the FII inflow was to double and even triple in 4 years. There was another major change made
in year 2009-10 that there increased the equity participation from 51% to 71% for foreign investors.
Degree of
Observations
freedom Critical
Month F test Description-on
Buy Sell Buy Sell value
Jan 20 20 19 19 0.58 0.46 Rejected
Feb 20 20 19 19 0.79 0.46 Rejected
March 21 21 20 20 1.55 2.12 Accepted
116
Apr 20 20 19 19 1.13 2.17 Accepted

May 13 13 12 12 0.78 0.37 Rejected
Jun 22 22 21 21 2.58 2.08 Rejected
July 22 22 21 21 2.32 2.08 Rejected
Aug 22 22 21 21 0.80 0.48 Rejected
Sep 21 21 20 20 4.10 2.12 Rejected
Oct 21 21 20 20 1.16 2.12 Accepted
Nov 21 21 20 20 1.69 2.12 Accepted
Dec 22 22 21 21 0.71 0.48 Rejected
can exhibit that the in the year 2010 the null hypothesis are mostly rejected, which shows that there
is an influence of FIIs on the equity stock market.
7. Limitation of the Study

• The selected sample size is only from NSE 50.
• This study is based on secondary data which has been taken from published Annual report
and from published journals and magazines and therefore its findings depend entirely on the
accuracy of such data
• The inference made is purely from the past years performance.
• The present study is largely based on accounting techniques and statistical techniques and
they have their own limitations which also apply to the study.
8. Findings of the Study

1. It is an accepted fact now that FIIs have significant influence on the movements of the stock
market indexes in India. If one looks at the total FII trade in equity in India and its relationship
with the stock market major indexes like Nifty, it shows a steadily growing influence of FIIs
in the domestic stock market.
2. NSE also observes that in the Indian stock markets FIIs have a disproportionately high level
of influence on the market sentiments and price trends. This is so because other market
participants perceive the FIIs to be infallible in their assessment of the market and tend to
117
follow the decisions taken by FIIs. This „herd instinct displayed by other market participants
amplifies the importance of FIIs in the domestic stock market in India.
3. Results of this study show that not only the FIIs are the major players in the domestic stock
market in India, but their influence on the domestic markets is also growing. Data on trading
activity of FIIs and domestic stock market turnover suggest that FII s are becoming more
important at the margin as an increasingly higher share of stock market turnover is accounted
for by FII trading.
4. The findings of this study also indicate that Foreign Institutional Investors have emerged as
the most dominant investor group in the domestic stock market in India. Dominant position
of FIIs in the Nifty companies, it is not surprising that FIIs are in a position to influence the
movement of Nifty in a significant way.
9. Conclusion
This paper provides a preliminary analysis of FII flows to India and their influence on the
prices of stocks in the Indian stock market. A more detailed study using daily data of equity returns
for a longer period or, better still, disaggregated data showing the transactions of individual FIIs at
the stock level can help address questions regarding the extent of herding or return-chasing behaviour
among FIIs which now account for a significant part of the capital account balance in our balance
of payments. The extent to which FII participation in Indian markets has helped lower cost of
capital to Indian industries is also an important issue to investigate. Broader and more long-term
issues involving foreign portfolio investment in India and their economy-wide implications have not
been addressed in this paper. Such issues would invariably require an estimation of the societal
costs of the volatility and uncertainty associated with FII flows. A detailed understanding of the
nature and determinants of FII flows to India would help us address such questions in a more
informed manner and allow us to better evaluate the risks and benefits of foreign portfolio investment
in India.
References
1. Anand Bansal (2009), “Foreign Institutional Investor’s Impact on Stock Price in India”,
Journal of Academic Research in Economics
2. Bharati V. Pathak ,“Indian Financial System”, Pearson Education, 2nd Edition.
3. Black, F., and M. (1973), “The Pricing of Options and Corporate Liabilities”, Journal of
Political Economy.
4. Brealey, R. A. Myers, S. C. (2005), “Principles of Corporate Finance”, Tata McGraw-
Hill. New Delhi. 2005.
5. Chakrabarti, R (2001), “FII Flows to India: Nature and Causes,” Money and Finance, Vol.
2, Issue 7, Oct-Dec.
118
6. C. R. Kothari, “Research Methodology-Methods & Techniques”, New Age International

(P) Ltd, Publishers, 2nd Edition.
7. Downs, T. W., (1991). “An Alternate Approach to Fundamental Analysis: The Asset Side of
the Equation,” Journal of Portfolio Management.
8. Dr. Hojatallah Goudarzi & Dr. C. S. Ramanarayanan (2011), “Empirical Analysis of the
Impact of Foreign Institutional Investment on the Indian Stock Market Volatility during World
Financial Crisis 2008-09”, International Journal of Economics and Finance.
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Market Returns”, International Research Journal of Finance and Economics.
10. Hamada, R. S., (1972), “Portfolio Analysis, Market Equilibrium and Corporation Finance”,
the Journal of Finance.
11. Levin, R. I. Rubin, D. S. (2004), Statistics for Management, Prentice Hall of India. New
Delhi. 2004. P. 677-685
12. M. Y. Khan & P. K. Jain, “Financial Management - Text, Problems & Cases”, Tata McGraw
Hill, 4th Edition.
13. Rahul Dhiman (2012), “Impact Of Foreign Institutional Investor on the Stock Market”,
International Journal of Research in Finance & Marketing. P. 33-46
14. Ravi Akula, (2011), “An Overview of Foreign Institutional Investment in India”, Indian
Journal of Commerce & Management Studies.
15. www.bseindia.com
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21. www.thehindubusinessline.com
119
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Vol. 1, No.

3 July - September, 2012

Impact of Foreign Institutional Investments on Equity Stock

Overview of Indian Stock Market

3. Objectives of the Study

Table 3 : Trends in FII Investment (Year: 2008)

May-09 77,886.40 57,279.50 20,606.90

July 2697.86 2898.03 849767.31 406711.5317 -1,012.90 4124.60

Table 12 : F-statistics FII and S&P CNX Nifty (Year: 2009)

Apr 20 20 19 19 1.13 2.17 Accepted

7. Limitation of the Study

8. Findings of the Study

6. C. R. Kothari, “Research Methodology-Methods & Techniques”, New Age International

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